UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One) |
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x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 29, 2007 |
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OR |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
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Utah |
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87-0500306 |
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(State or other jurisdiction |
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(I.R.S. Employer |
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of incorporation or organization) |
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Identification No.) |
3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the registrant’s common stock as of November 2, 2007 was 16,135,889.
USANA HEALTH SCIENCES, INC.
For the Quarterly Period Ended September 29, 2007
INDEX
2
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
(in thousands)
|
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December 30, |
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September 29, |
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|
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2006 |
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2007 |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
27,029 |
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$ |
11,718 |
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Inventories |
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22,483 |
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21,058 |
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Prepaid expenses and other current assets |
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8,908 |
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10,379 |
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Deferred income taxes |
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2,195 |
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2,462 |
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Total current assets |
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60,615 |
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45,617 |
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Property and equipment, net |
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30,323 |
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45,838 |
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Goodwill |
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5,690 |
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5,690 |
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Other assets |
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3,374 |
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4,503 |
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$ |
100,002 |
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$ |
101,648 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
10,241 |
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$ |
7,910 |
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Other current liabilities |
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29,564 |
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32,507 |
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Total current liabilities |
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39,805 |
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40,417 |
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Line of credit |
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— |
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34,625 |
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Other long-term liabilities |
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— |
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1,673 |
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Stockholders’ equity |
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Common stock, $0.001 par value; authorized 50,000 shares, issued and outstanding 17,859 as of December 30, 2006 and 16,130 as of September 29, 2007 |
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18 |
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16 |
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Additional paid-in capital |
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15,573 |
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4,831 |
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Retained earnings |
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44,251 |
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19,049 |
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Accumulated other comprehensive income |
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355 |
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1,037 |
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Total stockholders’ equity |
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60,197 |
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24,933 |
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$ |
100,002 |
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$ |
101,648 |
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The accompanying notes are an integral part of these statements.
3
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
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Quarter Ended |
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||||
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September 30, |
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September 29, |
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2006 |
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2007 |
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Net sales |
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$ |
91,967 |
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$ |
106,181 |
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Cost of sales |
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20,274 |
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21,960 |
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Gross profit |
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71,693 |
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84,221 |
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Operating expenses: |
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Associate incentives |
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36,994 |
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43,021 |
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Selling, general and administrative |
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17,798 |
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23,053 |
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Research and development |
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830 |
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864 |
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Total operating expenses |
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55,622 |
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66,938 |
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Earnings from operations |
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16,071 |
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17,283 |
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Other income (expense): |
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Interest income |
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141 |
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53 |
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Interest expense |
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— |
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(576 |
) |
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Other, net |
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(76 |
) |
253 |
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Other income (expense), net |
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65 |
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(270 |
) |
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Earnings from continuing operations before income taxes |
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16,136 |
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17,013 |
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Income taxes |
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5,698 |
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5,350 |
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Income from continuing operations |
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10,438 |
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11,663 |
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Loss from discontinued operations, net of tax benefit |
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(215 |
) |
(405 |
) |
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Net earnings |
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$ |
10,223 |
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$ |
11,258 |
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Earnings per common share |
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Basic |
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Continuing operations |
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$ |
0.59 |
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$ |
0.72 |
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Discontinued operations |
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(0.02 |
) |
(0.02 |
) |
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Net earnings |
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$ |
0.57 |
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$ |
0.70 |
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Diluted |
|
|
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Continuing operations |
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$ |
0.56 |
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$ |
0.70 |
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Discontinued operations |
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(0.01 |
) |
(0.02 |
) |
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|
|
|
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Net earnings |
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$ |
0.55 |
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$ |
0.68 |
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|
|
|
|
|
|
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Weighted average common shares outstanding |
|
|
|
|
|
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Basic |
|
17,780 |
|
16,173 |
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Diluted |
|
18,486 |
|
16,613 |
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The accompanying notes are an integral part of these statements.
4
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
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Nine Months Ended |
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|
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September 30, |
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September 29, |
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|
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2006 |
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2007 |
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|
|
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Net sales |
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$ |
267,045 |
|
$ |
314,401 |
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|
|
|
|
|
|
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Cost of sales |
|
57,971 |
|
64,989 |
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||
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|
|
|
|
|
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Gross profit |
|
209,074 |
|
249,412 |
|
||
|
|
|
|
|
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Operating expenses: |
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|
|
|
|
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Associate incentives |
|
107,025 |
|
125,850 |
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Selling, general and administrative |
|
53,198 |
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67,085 |
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Research and development |
|
2,259 |
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2,696 |
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|
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|
|
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Total operating expenses |
|
162,482 |
|
195,631 |
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|
|
|
|
|
|
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Earnings from operations |
|
46,592 |
|
53,781 |
|
||
|
|
|
|
|
|
|
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Other income (expense): |
|
|
|
|
|
||
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Interest income |
|
446 |
|
447 |
|
||
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Interest expense |
|
(4 |
) |
(985 |
) |
||
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Other, net |
|
254 |
|
726 |
|
||
|
|
|
|
|
|
|
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Other income, net |
|
696 |
|
188 |
|
||
|
|
|
|
|
|
|
||
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Earnings from continuing operations before income taxes |
|
47,288 |
|
53,969 |
|
||
|
|
|
|
|
|
|
||
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Income taxes |
|
16,533 |
|
19,099 |
|
||
|
|
|
|
|
|
|
||
|
Income from continuing operations |
|
30,755 |
|
34,870 |
|
||
|
|
|
|
|
|
|
||
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Loss from discontinued operations, net of tax benefit |
|
(628 |
) |
(612 |
) |
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
30,127 |
|
$ |
34,258 |
|
|
|
|
|
|
|
|
||
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Earnings per common share |
|
|
|
|
|
||
|
Basic |
|
|
|
|
|
||
|
Continuing operations |
|
$ |
1.70 |
|
$ |
2.06 |
|
|
Discontinued operations |
|
(0.04 |
) |
(0.04 |
) |
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
1.66 |
|
$ |
2.02 |
|
|
|
|
|
|
|
|
||
|
Diluted |
|
|
|
|
|
||
|
Continuing operations |
|
$ |
1.63 |
|
$ |
2.00 |
|
|
Discontinued operations |
|
(0.03 |
) |
(0.03 |
) |
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
1.60 |
|
$ |
1.97 |
|
|
|
|
|
|
|
|
||
|
Weighted average common shares outstanding |
|
|
|
|
|
||
|
Basic |
|
18,130 |
|
16,926 |
|
||
|
Diluted |
|
18,830 |
|
17,413 |
|
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The accompanying notes are an integral part of these statements.
5
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2006 and September 29, 2007
(in thousands)
(unaudited)
|
|
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|
|
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|
|
|
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Accumulated |
|
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|
|||||
|
|
|
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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|
|||||
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Shares |
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Value |
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Capital |
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Earnings |
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Income (Loss) |
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Total |
|
|||||
|
|
|
|
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|
|
|
|
|
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For the Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
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|
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|
|||||
|
|
|
|
|
|
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|
|
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|||||
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Balance at December 31, 2005 |
|
18,343 |
|
$ |
18 |
|
$ |
9,161 |
|
$ |
35,720 |
|
$ |
839 |
|
$ |
45,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings |
|
— |
|
— |
|
— |
|
30,127 |
|
— |
|
30,127 |
|
|||||
|
Foreign currency translation adjustment, net |
|
— |
|
— |
|
— |
|
— |
|
(20 |
) |
(20 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
30,107 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock retired |
|
(868 |
) |
(1 |
) |
(6,367 |
) |
(26,737 |
) |
— |
|
(33,105 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock awarded to Associates |
|
2 |
|
1 |
|
100 |
|
— |
|
— |
|
101 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Equity-based compensation expense |
|
— |
|
— |
|
3,468 |
|
— |
|
— |
|
3,468 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock issued under equity-based award plan, including tax benefit of $3,090 |
|
334 |
|
— |
|
5,634 |
|
— |
|
— |
|
5,634 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance at September 30, 2006 |
|
17,811 |
|
$ |
18 |
|
$ |
11,996 |
|
$ |
39,110 |
|
$ |
819 |
|
$ |
51,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
For the Nine Months Ended September 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance at December 30, 2006 |
|
17,859 |
|
$ |
18 |
|
$ |
15,573 |
|
$ |
44,251 |
|
$ |
355 |
|
$ |
60,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings |
|
— |
|
— |
|
— |
|
34,258 |
|
— |
|
34,258 |
|
|||||
|
Foreign currency translation adjustment, net |
|
— |
|
— |
|
— |
|
— |
|
682 |
|
682 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
34,940 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock retired |
|
(1,892 |
) |
(2 |
) |
(20,118 |
) |
(59,460 |
) |
— |
|
(79,580 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock awarded to Associates |
|
1 |
|
|
|
47 |
|
|
|
|
|
47 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Equity-based compensation expense |
|
— |
|
— |
|
4,786 |
|
— |
|
— |
|
4,786 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common stock issued under equity-based award plan, including tax benefit of $1,458 |
|
162 |
|
— |
|
4,543 |
|
— |
|
— |
|
4,543 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance at September 29, 2007 |
|
16,130 |
|
$ |
16 |
|
$ |
4,831 |
|
$ |
19,049 |
|
$ |
1,037 |
|
$ |
24,933 |
|
The accompanying notes are an integral part of these statements.
6
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
Nine Months Ended |
|
||||
|
|
|
September 30, |
|
September 29, |
|
||
|
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
||
|
Cash flows from operating activities |
|
|
|
|
|
||
|
Net earnings |
|
$ |
30,127 |
|
$ |
34,258 |
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities |
|
|
|
|
|
||
|
Depreciation and amortization |
|
4,249 |
|
3,599 |
|
||
|
(Gain) loss on disposition of property and equipment |
|
(2 |
) |
59 |
|
||
|
Equity-based compensation expense |
|
3,468 |
|
4,786 |
|
||
|
Excess tax benefit from equity-based payment arrangements |
|
(2,109 |
) |
(1,071 |
) |
||
|
Common stock awarded to Associates |
|
101 |
|
47 |
|
||
|
Deferred income taxes |
|
(1,309 |
) |
(1,140 |
) |
||
|
Provision for inventory valuation |
|
1,813 |
|
973 |
|
||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
|
Inventories |
|
(1,897 |
) |
1,515 |
|
||
|
Prepaid expenses and other assets |
|
(544 |
) |
(1,640 |
) |
||
|
Accounts payable |
|
3,953 |
|
(2,443 |
) |
||
|
Other current liabilities |
|
7,189 |
|
5,199 |
|
||
|
|
|
|
|
|
|
||
|
Total adjustments |
|
14,912 |
|
9,884 |
|
||
|
|
|
|
|
|
|
||
|
Net cash provided by operating activities |
|
45,039 |
|
44,142 |
|
||
|
|
|
|
|
|
|
||
|
Cash flows from investing activities |
|
|
|
|
|
||
|
Receipts on notes receivable |
|
— |
|
91 |
|
||
|
Increases in notes receivable |
|
— |
|
(667 |
) |
||
|
Proceeds from the sale of property and equipment |
|
17 |
|
769 |
|
||
|
Purchases of property and equipment |
|
(6,278 |
) |
(19,008 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash used in investing activities |
|
(6,261 |
) |
(18,815 |
) |
||
|
|
|
|
|
|
|
||
|
Cash flows from financing activities |
|
|
|
|
|
||
|
Proceeds from equity awards exercised |
|
2,544 |
|
3,085 |
|
||
|
Excess tax benefit from equity-based payment arrangements |
|
2,109 |
|
1,071 |
|
||
|
Retirement of common stock |
|
(33,105 |
) |
(79,580 |
) |
||
|
Borrowings on line of credit |
|
— |
|
97,043 |
|
||
|
Payments on line of credit |
|
— |
|
(62,418 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash used in financing activities |
|
(28,452 |
) |
(40,799 |
) |
||
|
|
|
|
|
|
|
||
|
Effect of exchange rate changes on cash and cash equivalents |
|
72 |
|
161 |
|
||
|
|
|
|
|
|
|
||
|
Net increase (decrease) in cash and cash equivalents |
|
10,398 |
|
(15,311 |
) |
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, beginning of period |
|
10,579 |
|
27,029 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, end of period |
|
$ |
20,977 |
|
$ |
11,718 |
|
|
|
|
|
|
|
|
||
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
||
|
Cash paid during the period for: |
|
|
|
|
|
||
|
Interest |
|
$ |
5 |
|
$ |
964 |
|
|
Income taxes |
|
15,788 |
|
19,472 |
|
||
The accompanying notes are an integral part of these statements.
7
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Basis of Presentation
The unaudited interim consolidated financial information of USANA Health Sciences, Inc. and its subsidiaries (collectively, the “Company” or “USANA”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments necessary to present fairly the Company’s financial position as of September 29, 2007, and results of operations for the quarters and nine months ended September 30, 2006 and September 29, 2007. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. The results of operations for the quarter ended September 29, 2007 may not be indicative of the results that may be expected for the fiscal year ending December 29, 2007.
Revisions
Revisions relating to net sales and Associate incentives expense have been made to the Company’s financial statements in order to comply with EITF 01-09 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”. Under these guidelines, certain incentives that are offered to our Associates are classified as sales discounts, resulting in a reduction of revenue, with a corresponding reduction to Associate incentives. Net sales and Associate incentives expense numbers reflected throughout this document for periods prior to December 31, 2006, have been revised accordingly. The impact of these revisions reduced previously reported net sales for the quarter ended September 30, 2006 by 1.6%. These revisions had no effect on our earnings from operations, net earnings, or earnings per share.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company has evaluated SFAS No. 157 and has determined that it will not have a material impact on its Consolidated Financial Statements.
On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits an entity to choose to measure eligible items at fair value at specified election dates. An entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years that begin after November 15, 2007. The Company has evaluated SFAS No. 159 and has determined that it will not have a material impact on its Consolidated Financial Statements.
On June 27, 2007, the FASB ratified the EITF consensus on EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”, which calls for nonrefundable advance payments for goods or services that are to be used in future research and development activities to be deferred and capitalized until such time as the related goods are delivered or the related services are performed, at which point the amounts are to be recognized as an expense. EITF 07-3 is effective for fiscal periods beginning after December 15, 2007. The Company has evaluated its research
8
and development contracts in regard to this new pronouncement and has determined that the effect of this consensus will not have a material impact on its financial statements.
NOTE A – EQUITY-BASED COMPENSATION
Equity-based compensation expense relating to awards vested under the current and previous plans utilized by the Company, together with the related tax benefit recognized in earnings for the quarters and nine months ended September 30, 2006, and September 29, 2007, are as follows:
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
||||
|
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cost of sales |
|
$ |
145 |
|
$ |
181 |
|
$ |
415 |
|
$ |
496 |
|
|
Selling, general and administrative |
|
1,033 |
|
1,315 |
|
2,670 |
|
3,927 |
|
||||
|
Research and development |
|
138 |
|
70 |
|
383 |
|
363 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
1,316 |
|
1,566 |
|
3,468 |
|
4,786 |
|
||||
|
Related tax benefit |
|
446 |
|
542 |
|
1,094 |
|
1,647 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net equity-based compensation expense |
|
$ |
870 |
|
$ |
1,024 |
|
$ |
2,374 |
|
$ |
3,139 |
|
The following table shows the remaining unrecognized compensation expense on a pre-tax basis that is related to all types of equity awards that were outstanding as of September 29, 2007. This table does not include an estimate for future grants that may be issued.
|
Remainder of 2007 |
|
$ |
1,511 |
|
|
2008 |
|
5,746 |
|
|
|
2009 |
|
3,853 |
|
|
|
2010 |
|
3,393 |
|
|
|
2011 |
|
1,960 |
|
|
|
Thereafter |
|
418 |
|
|
|
|
|
$ |
16,881 |
|
The weighted-average period over which the expense above will be recognized is 2.3 years.
During 2006 and the first nine months of 2007, the Company continued to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility. Expected volatility is calculated by averaging the historical volatility of the Company and a peer group index. The risk-free interest rate is based on the U.S. Treasury yield curve on the date of grant with respect to the expected life of the award. Due to the “plain vanilla” characteristics of the Company’s equity awards, the “simplified method,” as permitted by the guidance in Staff Accounting Bulletin No. 107, has been used to determine expected life.
9
Weighted-average assumptions used to calculate the fair value of awards that have been granted during the periods ended as of the dates indicated are included in the table below. Deferred stock units are full-value shares at the date of grant and have been excluded.
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
|||||||
|
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
|||
|
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Expected volatility |
|
57.04 |
% |
|
* |
57.04 |
% |
41.88 |
% |
|||
|
Risk-free interest rate |
|
5.04 |
% |
|
* |
4.81 |
% |
4.59 |
% |
|||
|
Expected life |
|
4.3 yrs. |
|
|
* |
4.1 yrs. |
|
4.2 yrs. |
|
|||
|
Expected dividend yield |
|
— |
|
|
* |
— |
|
— |
|
|||
|
Grant price |
|
$ |
36.73 |
|
|
* |
$ |
38.00 |
|
$ |
42.10 |
|
*There were no equity awards granted during the quarter ended September 29, 2007.
A summary of the Company’s stock option and stock-settled stock appreciation right activity for the nine months ended September 29, 2007 is as follows:
|
|
|
Shares |
|
Weighted- |
|
Weighted-average remaining |
|
Aggregate |
|
||
|
Outstanding at December 30, 2006 |
|
1,720 |
|
$ |
27.15 |
|
5.8 |
|
$ |
42,172 |
|
|
Granted |
|
449 |
|
$ |
42.10 |
|
|
|
|
|
|
|
Exercised |
|
(162 |
) |
$ |
19.01 |
|
|
|
|
|
|
|
Canceled or expired |
|
(90 |
) |
$ |
35.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Outstanding at September 29, 2007 |
|
1,917 |
|
$ |
30.97 |
|
5.1 |
|
$ |
25,122 |
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Exercisable at September 29, 2007 |
|
848 |
|
$ |
22.60 |
|
5.7 |
|
$ |
17,973 |
|
* Aggregate intrinsic value is defined as the difference between the current market value at period end and the exercise price of awards that were in-the-money and is estimated using the closing price of the Company’s common stock on the last trading day of the period.
The weighted-average fair value of stock options and stock-settled stock appreciation rights that were granted during the nine-month periods ended September 30, 2006, and September 29, 2007 was $18.74 and $16.79, respectively. The total intrinsic value of awards that were exercised during the nine-month periods ended September 30, 2006 and September 29, 2007, was $11,313 and $5,734, respectively.
10
A summary of the Company’s deferred stock unit activity for the nine months ended September 29, 2007 is as follows:
|
|
|
Shares |
|
Weighted- |
|
|
|
Non-vested at December 30, 2006 |
|
1 |
|
$ |
37.60 |
|
|
Granted |
|
3 |
|
$ |
40.59 |
|
|
Vested |
|
(2 |
) |
$ |
39.54 |
|
|
Canceled or expired |
|
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Non-vested at September 29, 2007 |
|
2 |
|
$ |
40.59 |
|
The total fair value of awards that vested during the nine month periods ending September 30, 2006 and September 29, 2007, was $3,274 and $5,181, respectively. This total fair value included equity awards that were issued in the form of stock options, stock-settled stock appreciation rights, and deferred stock units.
NOTE B – DISCONTINUED OPERATIONS
On August 10, 2007, the Company completed the sale of certain assets of its third-party contract manufacturing business for total cash proceeds of $3,444. The assets sold consisted of accounts receivable, inventories, and property and equipment. The Company will retain assets that are associated with manufacturing and packaging its Sensé™ skin and beauty care products and will continue to manufacture these products at its Draper, Utah facility. The results of the third-party contract manufacturing operations have been classified as “discontinued” for all periods presented.
The Company’s sales reported in discontinued operations for the quarter and nine months ended September 30, 2006 were $1,731 and $7,364, respectively, and for the quarter and nine months ended September 29, 2007 were $706 and $4,460, respectively.
The following table
shows the composition of discontinued operations on the Consolidated Statement
of Earnings for the quarter and nine months ended September 30, 2006 and
September 29, 2007.
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
||||
|
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss from discontinued operations |
|
$ |
(331 |
) |
$ |
(608 |
) |
$ |
(965 |
) |
$ |
(938 |
) |
|
Loss from disposal |
|
— |
|
(17 |
) |
— |
|
(17 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
(331 |
) |
(625 |
) |
(965 |
) |
(955 |
) |
||||
|
Income tax benefit |
|
(116 |
) |
(220 |
) |
(337 |
) |
(343 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss from discontinued operations (net of tax benefit) |
|
$ |
(215 |
) |
$ |
(405 |
) |
$ |
(628 |
) |
$ |
(612 |
) |
11
The following table is a summary of the assets sold as initially valued at June 30, 2007 and as finally recorded on the closing date of August 10, 2007.
|
|
|
June 30, |
|
August 10, |
|
||
|
|
|
2007 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Inventory |
|
$ |
1,492 |
|
$ |
1,669 |
|
|
Accounts receivable |
|
1,087 |
|
1,086 |
|
||
|
Property, plant and equipment, net of $594 of accumulated depreciation |
|
706 |
|
706 |
|
||
|
|
|
|
|
|
|
||
|
Net assets of discontinued operations |
|
$ |
3,285 |
|
$ |
3,461 |
|
Inventories consist of the following:
|
|
|
December 30, |
|
September 29, |
|
||
|
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Raw materials |
|
$ |
8,073 |
|
$ |
5,480 |
|
|
Work in progress |
|
4,227 |
|
4,407 |
|
||
|
Finished goods |
|
10,183 |
|
11,171 |
|
||
|
|
|
$ |
22,483 |
|
$ |
21,058 |
|
Prepaid expenses and other current assets consist of the following:
|
|
|
December 30, |
|
September 29, |
|
||
|
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Prepaid expenses |
|
$ |
2,150 |
|
$ |
1,411 |
|
|
Miscellaneous receivables, net |
|
5,082 |
|
6,407 |
|
||
|
Other current assets |
|
1,676 |
|
2,561 |
|
||
|
|
|
$ |
8,908 |
|
$ |
10,379 |
|
12
Cost of property and equipment and their estimated useful lives is as follows:
|
|
|
|
|
December 30, |
|
September 29, |
|
||
|
|
|
Years |
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Buildings |
|
40 |
|
$ |
10,682 |
|
$ |
14,195 |
|
|
Laboratory and production equipment |
|
5-7 |
|
10,863 |
|
10,693 |
|
||
|
Sound and video library |
|
5 |
|
600 |
|
600 |
|
||
|
Computer equipment and software |
|
3-5 |
|
23,365 |
|
24,138 |
|
||
|
Furniture and fixtures |
|
3-5 |
|
2,719 |
|
2,854 |
|
||
|
Automobiles |
|
3-5 |
|
242 |
|
187 |
|
||
|
Leasehold improvements |
|
3-5 |
|
2,834 |
|
3,125 |
|
||
|
Land improvements |
|
15 |
|
931 |
|
1,453 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
52,236 |
|
57,245 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Less accumulated depreciation and amortization |
|
|
|
33,330 |
|
35,625 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
18,906 |
|
21,620 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Land |
|
|
|
2,070 |
|
2,077 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Deposits and projects in process |
|
|
|
9,347 |
|
22,141 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
$ |
30,323 |
|
$ |
45,838 |
|
NOTE F – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
|
|
|
December 30, |
|
September 29, |
|
||
|
|
|
2006 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Associate incentives |
|
$ |
5,793 |
|
$ |
5,875 |
|
|
Accrued employee compensation |
|
7,022 |
|
8,070 |
|
||
|
Income taxes |
|
3,095 |
|
2,112 |
|
||
|
Sales taxes |
|
4,031 |
|
4,231 |
|
||
|
Associate promotions |
|
711 |
|
407 |
|
||
|
Deferred revenue |
|
3,092 |
|
4,315 |
|
||
|
Provision for returns and allowances |
|
947 |
|
1,005 |
|
||
|
All other |
|
4,873 |
|
6,492 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
29,564 |
|
$ |
32,507 |
|
NOTE G – LONG TERM DEBT AND LINE OF CREDIT
The Company currently maintains a $40,000 revolving line of credit with a maturity date of May 30, 2011. As of September 29, 2007, there was an outstanding balance of $34,625 that was associated with the above line of credit, with a weighted-average interest rate of 6.6%. The Company, therefore, had $5,375 available under the line of credit as of that date. The interest rate under this line of credit is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the agreement.
13
NOTE H – COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, the Company is party to various legal claims, actions, and complaints. In March and April 2007, three shareholder class action complaints were filed against the Company and certain of its executive officers. On October 17, 2007 these three cases were consolidated into one action. In June 2007, two former Company Associates filed a class action lawsuit against the Company. In September 2007, a shareholder derivative lawsuit was filed against certain of the Company’s officers and directors. The derivative complaint, which names the Company as a nominal defendant but is asserted on the Company’s behalf, contains allegations similar to those asserted in the shareholder class action lawsuits described above and asserts that, as a result of such allegations, the defendant directors and officers breached their fiduciary duties of good faith and loyalty to the Company and were unjustly enriched. The Company believes that the claims in each of the foregoing lawsuits are without merit and plans to vigorously defend against these claims. The potential loss or range of loss that could arise from these complaints is not estimable at this time. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the financial statements.
14
NOTE I – COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of common shares outstanding for each period. Shares that have been repurchased and retired during the specified periods have been included in the calculation of weighted-average shares that are outstanding for the basic earnings per share calculation. Diluted earnings per share are based on common shares outstanding (computed under basic EPS) and potentially dilutive shares. Shares included in the diluted earnings per share calculations include equity awards that are in-the-money but that have not yet been exercised.
|
|
|
For the Quarter Ended |
|
||||
|
|
|
September 30, |
|
September 29, |
|
||
|
|
|
2006 |
|
2007 |
|
||
|
Earnings from continuing operations available to common shareholders |
|
$ |
10,438 |
|
$ |
11,663 |
|
|
Loss from discontinued operations available to common shareholders |
|
(215 |
) |
(405 |
) |
||
|
|
|
|
|
|
|
||
|
Net earnings available to common shareholders |
|
$ |
10,223 |
|
$ |
11,258 |
|
|
|
|
|
|
|
|
||
|
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shares |
|
|
|
|
|
||
|
Common shares outstanding entire period |
|
18,343 |
|
17,859 |
|
||
|
Weighted-average common shares: |
|
|
|
|
|
||
|
Issued during period |
|
263 |
|
130 |
|
||
|
Canceled during period |
|
(826 |
) |
(1,816 |
) |
||
|
|
|
|
|
|
|
||
|
Weighted-average common shares outstanding during period |
|
17,780 |
|
16,173 |
|
||
|
|
|
|
|
|
|
||
|
Earnings per common share from continuing operations - basic |
|
$ |
0.59 |
|
$ |
0.72 |
|
|
Loss per common share from discontinued operations - basic |
|
(0.02 |
) |
(0.02 |
) |
||
|
|
|
|
|
|
|
||
|
Earnings per common share from net earnings - basic |
|
$ |
0.57 |
|
$ |
0.70 |
|
|
|
|
|
|
|
|
||
|
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shares |
|
|
|
|
|
||
|
Weighted-average shares outstanding during period - basic |
|
17,780 |
|
16,173 |
|
||
|
Dilutive effect of equity awards |
|
706 |
|
440 |
|
||
|
|
|
|
|
|
|
||
|
Weighted-average shares outstanding during period - diluted |
|
18,486 |
|
16,613 |
|
||
|
|
|
|
|
|
|
||
|
Earnings per common share from continuing operations - diluted |
|
$ |
0.56 |
|
$ |
0.70 |
|
|
Loss per common share from discontinued operations - diluted |
|
(0.01 |
) |
(0.02 |
) |
||
|
|
|
|
|
|
|
||
|
Earnings per common share from net earnings - diluted |
|
$ |
0.55 |
|
$ |
0.68 |
|
Equity awards for 16 and 48 shares of stock were not included in the computation of EPS for the quarters ended September 30, 2006 and September 29, 2007, respectively, due to their exercise prices being greater than the average market price of the shares during those periods.
15
|
|
|
For the Nine Months Ended |
|||||
|
|
|
September 30, |
|
September 29, |
|
||
|
|
|
2006 |
|
2007 |
|
||
|
Earnings from continuing operations available to common shareholders |
|
$ |
30,755 |
|
$ |
34,870 |
|
|
Loss from discontinued operations available to common shareholders |
|
(628 |
) |
(612 |
) |
||
|
|
|
|
|
|
|
||
|
Net earnings available to common shareholders |
|
$ |
30,127 |
|
$ |
34,258 |
|
|
|
|
|
|
|
|
||
|
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shares |
|
|
|
|
|
||
|
Common shares outstanding entire period |
|
18,343 |
|
17,859 |
|
||
|
Weighted-average common shares: |
|
|
|
|
|
||
|
Issued during period |
|
184 |
|
100 |
|
||
|
Canceled during period |
|
(397 |
) |
(1,033 |
) |
||
|
|
|
|
|
|
|
||
|
Weighted-average common shares outstanding during period |
|
18,130 |
|
16,926 |
|
||
|
|
|
|
|
|
|
||
|
Earnings per common share from continuing operations - basic |
|
$ |
1.70 |
|
$ |
2.06 |
|
|
Loss per common share from discontinued operations - basic |
|
(0.04 |
) |
(0.04 |
) |
||
|
|
|
|
|
|
|
||
|
Earnings per common share from net earnings - basic |
|
$ |
1.66 |
|
$ |
2.02 |
|
|
|
|
|
|
|
|
||
|
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shares |
|
|
|
|
|
||
|
Weighted-average shares outstanding during period - basic |
|
18,130 |
|
16,926 |
|
||
|
Dilutive effect of equity awards |
|
700 |
|
487 |
|
||
|
|
|
|
|
|
|
||
|
Weighted-average shares outstanding during period - diluted |
|
18,830 |
|
17,413 |
|
||
|
|
|
|
|
|
|
||
|
Earnings per common share from continuing operations - diluted |
|
$ |
1.63 |
|
$ |
2.00 |
|
|
Loss per common share from discontinued operations - diluted |
|
(0.03 |
) |
(0.03 |
) |
||
|
|
|
|
|
|
|
||
|
Earnings per common share from net earnings - diluted |
|
$ |
1.60 |
|
$ |
1.97 |
|
Equity awards for 218 and 28 shares of stock were not included in the computation of EPS for the nine months ended September 30, 2006 and September 29, 2007, respectively, due to their exercise prices being greater than the average market price of the shares during those periods.
During the nine months ended September 30, 2006, and September 29, 2007, the Company expended $33,105 and $79,580 to purchase 868 and 1,892 shares, respectively, under the Company’s share repurchase plan. The purchase of shares under this plan reduces the number of shares issued and outstanding in the above calculations.
16
NOTE J – SEGMENT INFORMATION
USANA operates in one reportable business segment as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global seamless network marketing system of independent Associates. The Company manages its business primarily by managing its worldwide Associate base. Resources are allocated to markets for the purpose of developing an infrastructure that supports the Associate base and related sales. The Company does not use profitability reports on a regional or market basis for making business decisions. Performance for a region or market is primarily evaluated based on sales. In the table below, selected financial information is further presented in two geographic regions: North America and Asia Pacific. North America includes the United States, Canada, and Mexico. All other entities outside of North America are located within the Asia Pacific region, which includes Australia/New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, and Malaysia.
Segment Financial Information
Financial information, presented by geographic region for the quarters and nine months ended September 30, 2006 and September 29, 2007, is listed below:
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
||||
|
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
Net Sales to External Customers |
|
|
|
|
|
|
|
|
|
||||
|
North America |
|
$ |
60,502 |
|
$ |
66,619 |
|
$ |
181,018 |
|
$ |
199,328 |
|
|
Asia Pacific |
|
31,465 |
|
39,562 |
|
86,027 |
|
115,073 |
|
||||
|
Consolidated Total |
|
$ |
91,967 |
|
$ |
106,181 |
|
$ |
267,045 |
|
$ |
314,401 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total Assets |
|
|
|
|
|
|
|
|
|
||||
|
North America |
|
$ |
72,373 |
|
$ |
73,305 |
|
$ |
72,373 |
|
$ |
73,305 |
|
|
Asia Pacific |
|
14,452 |
|
28,343 |
|
14,452 |
|
28,343 |
|
||||
|
Consolidated Total |
|
$ |
86,825 |
|
$ |
101,648 |
|
$ |
86,825 |
|
$ |
101,648 |
|
The following table provides further net sales information on markets that represent ten percent or more of net sales:
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 29, |
|
September 30, |
|
September 29, |
|
||||
|
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net sales: |
|
|
|
|
|
|
|
|
|
||||
|
United States |
|
$ |
39,425 |
|
$ |
42,455 |
|
$ |
117,143 |
|
$ |
127,948 |
|
|
Canada |
|
16,574 |
|
18,792 |
|
50,996 |
|
54,898 |
|
||||
|
Australia/New Zealand |
|
12,297 |
|
14,163 |
|
35,501 |
|
41,819 |
|
||||
Due to the centralized structure of our manufacturing operations and our corporate headquarters in the United States, a significant concentration of assets exists in this market. Long-lived assets in the United States as of September 30, 2006 and September 29, 2007 totaled $28,129 and $42,051, respectively.
17
NOTE K – INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2003. One notable exception is in Canada where the applicable federal statute of limitations is open back to 1998.
The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” on December 31, 2006. The implementation of FIN 48 did not result in a material change to the Company’s previous liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
Balance at December 30, 2006 |
|
$ |
1,523 |
|
|
|
|
|
|
|
|
Additions based on tax positions related to the current year |
|
223 |
|
|
|
|
|
|
|
|
|
Additions for tax positions of prior years |
|
285 |
|
|
|
|
|
|
|
|
|
Settlements |
|
(9 |
) |
|
|
|
|
|
|
|
|
Lapse of statute |
|
(439 |
) |
|
|
|
|
|
|
|
|
Balance at September 29, 2007 |
|
$ |
1,583 |
|
The Company anticipates that it is reasonably possible that unrecognized tax benefits, including interest and penalties, of up to $528 could be recognized within the next twelve months due to the lapse of the applicable statute of limitations. Recognition of these uncertain tax positions or any uncertain tax position that is included in the September 29, 2007 balance will result in an adjustment to the Company’s effective tax rate. The Company has determined that all material, temporary differences can be fully recognized for FIN 48 purposes.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes. In the first nine months of 2007, the Company recognized $82 in interest and penalties, compared to $56 in the first nine months of 2006. The Company has accrued $179 and $340 for the payment of interest and penalties at the end of the first nine months of 2006 and 2007, respectively.
18
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of USANA’s financial condition and results of operations should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended December 30, 2006, and our other filings, including Current Reports on Form 8-K that have been filed with the SEC through the date of this report.
Our fiscal year end is the Saturday closest to December 31st of each year. Fiscal year 2006 ended on December 30, 2006, and fiscal year 2007 will end on December 29, 2007.
Presentation
The selected consolidated financial data set forth in this report includes revisions that result in a reduction to both net sales and Associate incentives for the quarter and for the nine months ended September 30, 2006, but does not impact earnings from operations, net earnings, or earnings per share. These changes are discussed further under the title “Revisions” in the Notes to the Unaudited Consolidated Financial Statements that are contained in this report.
Additionally, due to the sale of certain assets related to the third-party contract manufacturing business, we now operate as one reportable business segment, Direct Selling. Our financial results have been adjusted to reflect the reclassification of sales and related expenses in the former Contract Manufacturing segment to discontinued operations for all periods presented. Further information on the sale of certain assets related to the third-party contract manufacturing business can be found in Note B — Discontinued Operations.
General
USANA develops and manufactures high-quality nutritional and personal care products. We market our products on the basis of high levels of bioavailability, safety, and quality. We distribute our products through a network marketing system, using independent distributors, whom we refer to as “Associates.” As of September 29, 2007, we had approximately 180,000 active Associates worldwide. We also sell products directly to “Preferred Customers,” who purchase our products for personal use only and who are not permitted to resell or distribute our products. As of September 29, 2007, we had approximately 79,000 active Preferred Customers worldwide. The majority of sales come from Associates. For the nine months ended September 29, 2007, sales to Associates accounted for approximately 87.3% of net sales. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period, either for personal use or for resale.
We consider our high-quality products, compact product lines, rewarding compensation plan, distributor support, and weekly Associate incentive payments to be attractive components of the USANA network marketing system. We believe that network marketing is an effective way to distribute our products because it allows person-to-person product education, which is not readily available through traditional distribution channels. Additionally, we feel that network marketing appeals to a broad cross-section of people, particularly those who are seeking to supplement their income, start a home-based business, or pursue entrepreneurial opportunities other than conventional full-time employment. Our Associates, who are also dedicated consumers of our products, are encouraged to build and manage their own sales force by recruiting, managing, and training others to sell our products. To support our Associates, we regularly sponsor meetings and events, which offer information about our products and our network marketing system. These meetings are designed to assist Associates in business development and to provide a forum for interaction with successful Associates and the USANA management team. We also provide low-cost sales tools, such as brochures, magazines, and DVDs, which we believe are integral to our Associates’ building and maintaining a successful home-based business.
19
Our primary product lines consist of USANAâ Nutritionals and Sensé – beautiful scienceâ (Sensé). The USANA Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers. Additionally, we offer combination packs, which generally contain a variety of products from each product line.
USANAâ Nutritionals.
The Essentials include core vitamin and mineral supplements that provide a foundation of advanced nutrition for every age group. To help meet the “essential” nutrient needs of children and teens during the years of development, when good nutrition is especially important, USANA offers: UsanimalsÔ, a formulation of vitamins, minerals, and antioxidants, in an easy-to-take, chewable tablet for children 13 months to 12 years old; and Body RoxÔ, a nutritional supplement containing 31 essential vitamins, minerals, antioxidants, and cofactors for adolescents 12 to 18 years old. USANAâ Essentials for adults consists of two products: Mega Antioxidant, a balanced, high-potency blend of 30 vitamins, antioxidants, and other important nutrients to support cellular metabolism and to counteract free-radical damage; and Chelated Mineral, a complete spectrum of essential minerals, in balanced, highly bioavailable forms. The USANAâ Essentials are also a part of the HealthPak 100™, a convenient pillow pack that also includes some key Optimizers. Additionally, during the third quarter of 2007, we introduced a new product concept called MyHealthPak™. This concept offers a fully customizable packaging system for our supplement products that allows customers to create their own personalized selection of our full line of nutritional supplements in a pillow pack similar to our HealthPak 100 product.
Optimizers are more targeted supplements that are designed to meet individual health and nutritional needs. Products in this category include Proflavanolâ, Poly Câ, Procosaâ II, CoQuinoneâ 30, BiOmega-3Ô, E-PrimeÔ, BodyRox™ - Active CalciumÔ Chewable, Active CalciumÔ, PhytoEstrinÔ, Palmetto PlusÔ, Ginkgo-PSÔ, Garlic ECÔ, Visionexâ, OptOmegaâ, Hepasil DTXÔ, and TenX™ Antioxidant Blast.
The Macro Optimizers include healthy, low-glycemic functional foods and other related products. NutrimealÔ, Fibergyâ, and SoyaMaxÔ drink mixes, as well as Nutrition and Fibergy Bars™ are included in this product category. Our RESET™ weight management program and the accompanying RESET kit are also part of the Macro-Optimizers. The RESET kit is conveniently packaged in a self-contained box with all of the USANA products needed to complete a five-day regimen. It is designed to assist adults in losing weight and to help them begin a positive, long-term change in diet.
Sensé - beautiful scienceâ
The Sensé™ product line includes premium, science-based, personal care products that support healthy skin and hair by providing advanced topical nourishment, moisturization, and protection. These products are manufactured with our patented self-preserving technology, which uses a unique blend of botanicals, antioxidants, and active ingredients to keep products fresh, without adding traditional chemical preservatives. Products in this line include Perfecting Essence, Gentle Daily Cleanser, Hydrating Toner, Daytime Protective Emulsion, Eye Nourisher, Night Renewal, Serum Intensive, Rice Bran Polisher, Crème Masque, Revitalizing Shampoo, Nourishing Conditioner, Firming Body Nourisher, Energizing Shower Gel, and Intensive Hand Therapy.
All Other
In addition to these principal product lines, we develop and sell materials and online tools that are designed to assist our Associates in building their businesses and marketing our products. These resource materials and sales tools include product brochures and business forms that are designed by us and printed by outside publishers. Our wholly-owned subsidiary, FMG Productions, doing business as USANA Studios, also produces multimedia tools, including CDs and DVDs. In addition, we occasionally provide reprints of other commercial publications that feature USANA and may be used as a sales tool. Also, we periodically contract with authors and publishers to produce or provide books, tapes, and other items that deal with health topics and personal motivation, which we then sell to our Associates. New Associates are required to purchase a starter kit, which contains USANA training materials that help Associates begin to build their businesses. Associates do not earn commissions on the sale of starter kits or sales tools.
20
The following table summarizes the approximate percentage of total product revenue that has been contributed by our major product lines for the specified nine-month periods:
|
|
|
Sales By Product Line |
|||
|
|
|
Nine Months Ended |
|
||
|
|
|
September 30, |
|
September 29, |
|
|
Product Line |
|
2006 |
|
2007 |
|
|
USANAâ Nutritionals |
|
|
|
|
|
|
Essentials * |
|
38 |
% |
36 |
% |
|
Optimizers |
|
34 |
% |
37 |
% |
|
Macro Optimizers |
|
13 |
% |
13 |
% |
|
Sensé – beautiful scienceâ |
|
11 |
% |
10 |
% |
|
All Other |
|
4 |
% |
4 |
% |
* The Essentials category under the USANAâ Nutritionals product line includes USANAâ Essentials, HealthPak 100Ô, Body RoxÔ, and UsanimalsÔ.
The following table highlights sales data for our top-selling products as a percentage of product sales for the specified nine-month periods:
|
|
|
Nine Months Ended |
|||
|
|
|
September 30, |
|
September 29, |
|
|
|
|
2006 |
|
2007 |
|
|
USANAâ Essentials |
|
21 |
% |
20 |
% |
|
HealthPak 100 ™ |
|
14 |
% |
13 |
% |
|
Proflavanolâ |
|
9 |
% |
10 |
% |
Forward-Looking Statements and Certain Risks
The statements contained in this report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons detailed in our most recent Annual Report on Form 10-K at pages 22 through 32. The fact that some of these risk factors may be the same or similar to our past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are part of doing business in the industry in which we operate and compete and will likely be present in all periods reported. The fact that certain risks are common in the industry does not lessen their significance. The forward-looking statements contained in this report, are made as of the date of this report and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:
• Our ability to attract and maintain a sufficient number of Associates;
• High turnover of Associates;
21
• Our dependence upon a network marketing system to distribute our products;
• Activities of our independent Associates;
• Our planned expansion into international markets, including delays in commencement of sales in any new market, delays in compliance with local marketing or other regulatory requirements, or changes in target markets;
• Rigorous government scrutiny of network marketing practices;
• Potential political events that may negatively affect economic conditions;
• Potential natural disasters that may negatively affect economic conditions;
• Potential effects of adverse publicity regarding the Company, nutritional supplements, or the network marketing industry;
• Reliance on key management personnel, including our Founder, Chairman of the Board of Directors, and Chief Executive Officer Myron W. Wentz, Ph.D.;
• Extensive government regulation of the Company’s products, manufacturing, and network marketing system;
• Potential inability to sustain or manage growth, including the failure to continue to develop new products;
• An increase in the amount of Associate incentives paid;
• Our reliance on the use of information technology;
• The adverse effect of the loss of a high-level sponsoring Associate, together with a group of leading Associates, in that person’s downline;
• The loss of product market share or Associates to competitors;
• Potential adverse effects of customs, duties, taxation, and transfer pricing regulations, including regulations governing distinctions between and Company responsibilities to employees and independent contractors;
• The fluctuation in the value of foreign currencies against the U.S. dollar;
• Our reliance on outside suppliers for raw materials and certain manufactured items;
• Shortages of raw materials that we use in certain of our products;
• Significant price increases of our key raw materials;
• Product liability claims and other risks that may arise with our manufacturing activity;
• Intellectual property risks;
• Liability claims that may arise with our “Athlete Guarantee” program;
• Continued compliance with debt covenants;
• Disruptions to shipping channels that are used to distribute our products to international warehouses; and
• The outcome of regulatory and litigation matters.
22
We continued to experience year-over-year growth during the quarter and nine months ended September 29, 2007, with net sales increasing 15.5% and 17.7%, respectively. Excluding the impact of changes in foreign currency, net sales increased 12.1% and 15.6%, respectively, for the third quarter and first nine months of 2007. As is typical with our business, overall sales growth can primarily be attributed to an increase in the number of our active Associates who purchased our products, either for personal consumption or for resale. Also, in January 2007 we began operations in Malaysia, which contributed $4.9 million to net sales for the quarter, and $12.6 million for the nine months ended September 29, 2007. Excluding sales generated in Malaysia, net sales grew 10.1%, and 13.0% over the same periods of the prior year. The third quarter of each year has historically been our softest in terms of sales growth. The summer vacation season in the Northern Hemisphere, along with the anticipation of new products to be introduced at our International Convention during the third quarter of each year, both contribute to the softness in our business during the third quarter.
Income from continuing operations increased 11.7% and 13.4%, respectively, for the quarter and nine months ended September 29, 2007. This increase can be attributed in most part to increased net sales and improved gross profit margin, offset partially by higher operating costs.
One of the key highlights of the current year quarter was our 15th annual International Convention held in Salt Lake City, Utah. At the Convention, we introduced MyHealthPak™, a new, fully customizable packaging system for our supplement products that allows customers to create their own personalized selection of our line of nutritional supplements in daily AM and PM pillow packs. MyHealthPak is currently available only to U.S. and Canadian customers. Since this is simply a new packaging system of the products that many customers currently consume, we expect the sales of this product to increase gradually as customers work through their existing supplies.
Also during the third quarter we completed the sale of certain assets of our third-party contract manufacturing business, which resulted in operations for the Contract Manufacturing segment being discontinued. We have retained the assets that are associated with manufacturing and packaging our Sensé™ skin and beauty care products and will continue to manufacture these products. This sale is consistent with our long-term objectives of focusing on our direct selling business.
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Quarters Ended September 30, 2006 and September 29, 2007
Net Sales. Net sales increased 15.5% to $106.2 million for the quarter ended September 29, 2007, an increase of $14.2 million from $92.0 million for the comparable quarter in 2006. The following table summarizes the changes in net sales by region and market for the fiscal quarters ended September 30, 2006 and September 29, 2007: